They were the darlings of high net worth individuals. They collected more than Rs 25,000 crore over the last financial year alone. They will be missed. For, RBI Relief Bonds-the famous 6.5 per cent tax-free option-are no longer available.

What, in their place, could you go for? Here's a quick rundown of your options.

RBI Relief Bonds: Not the 6.5 per cent tax-free relief bonds, but the 8 per cent taxable version of the bonds under the same name. These have been retained, and that comes as relief for high net worth individuals. In fact, these are the natural replacement. "As there is no upper limit here," explains Kanu Doshi, a tax consultant, "high net worth individuals can invest as much as they want." Further, 8 per cent is really a high rate of return. Even after considering the highest taxation bracket, you get 5.4 per cent by way of net return, well above a bank fixed deposit that fetches only around 5 per cent-that too taxable.

Floating Rate Income Funds: Another no upper-limit option. Though mutual fund investments are not altogether without risk, these schemes invest only in floating rate instruments or in very short-term papers, which makes them almost risk-free. And they do a reasonably good job of generating returns as well. "Last year they have given 4-4.5 per cent post-tax returns. This year, it is expected to be higher (because of the expected higher interest rate structure in the system)," according to Rajiv Bajaj, Managing Director, Bajaj Capital.

RBI senior citizen bonds: Starting August 1 this year, an option if you are over 60. Or an option if either of your parents are above 60; remember though, if the parent doesn't have an independent source of income (is a 'dependant', that is), the income from these bonds will be clubbed with yours for tax purposes. These bonds can be bought from the Reserve Bank or any other designated banks (such as HDFC Bank). Of five-year tenure, these bonds carry a coupon rate of 9 per cent, taxable. "Though it is taxable, the effective post-tax return (for those in the highest tax bracket) will work out to be 6.3 per cent," says Bajaj. The investment limit: Rs 15 lakh per person.

Public Provident Fund: The highest earning (8 per cent) tax-free investment available now. As a high net worth individual, though, its utility is limited by the fact that you can invest no more than Rs 70,000 a year in your PPF account. "And this restriction is based on the earning member and not the PPF accounts," says Viren Pandya, another tax consultant. That means the limit is applicable to you, your kids and even spouse (if not working). Further, it has a 15-year lock-in period, while the 8-per cent figure is assured only for the immediate year.

Reshuffling Debt

Conventional debt investors should shift from pure bond funds to the new array of debt funds. Here's why and how.

By Shilpa Nayak

The last few years were a party for debt investors. Money put into debt funds did very well overall. In fact, debt funds underwent a change in image. Classically seen as something meant for the cautious investor looking to park his money in a safe place, these funds suddenly came to be seen as a return-delivering alternative to equity funds. There was, of course, a big reason why all this was happening. Interest rates, after ruling high for years and years, went soft. This was unprecedented, and fund managers who took the right trading opportunities were able to post annualised double-digit returns. Some even delivered up to 18 per cent. But it was the bond funds, in particular, that saw most of the retail action, since such funds were the type in vogue during the boom.

Some Declines

No market stays unchanged for too long. The past year has seen a mild firming up of interest rates. And now that the US Federal Reserve has finally edged its own benchmark rate up (from the incredibly low 1 per cent post-9-11 regime), a further firming-up is being anticipated across the world, as also in India. Domestic inflation figures in India, meanwhile, have contributed to this sense of anticipation, and so, bond prices in the secondary market have slid.

Debt fund investors have not escaped unscathed. Having got used to buoyant returns, they must now contend with a sudden plunge, even negative returns-just as equity investors often have to. For many debt investors though, conservative as they are, this turbulence is a new experience they do not relish.

Risk is supposed to be associated with equity, right?

Not as it turns out. Nor is the sudden spate of bad numbers, a blip in the graph. Interest rate trends, determined as they are by a set of complex macroeconomic factors, tend to hold steady over months together. Of course, some of the poor bond market sentiment of the recent past (mid-July, specifically) was on account of the 'transaction tax' imposed on traded securities by the government in the Union Budget, but bonds have now been let out of this net. Debt market deals are free of transaction tax. So that headache is gone. Yet, it's the overall scenario that's proving difficult as far as debt investments go.

Listen to the experts. "In the current market scenario," says Sandesh Kirkire, Senior Vice President and Head (Debt Funds), Kotak Mutual Fund, "it is not possible to generate returns of more than 4-5.5 per cent on the entire debt bouquet, despite raising cash exposure and cutting maturities." While it's gotten tough for debt fund managers, it's tougher for diehard debt investors to make investment decisions these days.

Some Stability

According to broad spectrum investment advisors, a small equity allocation in a largely debt portfolio is a good way to neutralise the trauma of a sagging debt market, while also gaining a longer-term hedge against inflation.

But what if you want to stick to debt: is there something you can do?

Well, there is. Instead of switching asset class allocations, switch funds within the debt universe instead. Investors who are looking at longer tenure returns could switch to floating rate funds, and those in the game for a shorter duration could invest in liquid funds.

But what are these funds anyway?

Liquid funds-also called gilt funds-are funds that invest in relatively safe bonds that sell easily in the debt market regardless of market conditions, such as different types of medium and long-term government securities, apart from top-quality corporate debt (with highest ratings). Now, liquid funds have an in-built stability. Even if corporate bonds falter because of market conditions, government paper remains in demand for assorted non-speculative purposes (banks need these for capital adequacy requirements, for example). Regular bond funds, in contrast, have corporate bonds and money market instruments too, which makes them volatile.

Floating funds, meanwhile, are typically meant for people who are looking for stable returns minus the volatility. These are "a good bet for small investors", in the words of Kirkire. Such funds would be an ideal investment bet in a rising rate scenario of the sort the market is currently witnessing. As open-ended income funds, their portfolios comprise floating-rate debt instruments, fixed-rate debt instruments swapped for floating-rate return, as also fixed-rate debt instruments and money-market instruments. They come in two basic term-based options, short maturity as well as long maturity, though it is for long periods that they make more sense (since interest rates display their biggest ups and downs only over long time-spans). Other than that, the choice is between 'growth' funds, which accumulate your earnings, and dividend-giving funds, which provide a stream of cash.

But what is the 'float' all about? This is not very complicated, if you take the trouble to understand it. Typically, a floating rate fund benchmarks the securities against a market-driven rate such as the Mumbai Interbank Offer Rate (mibor). This means that every time the mibor changes, the coupon rate on the instrument is automatically adjusted accordingly. Hence the coupon rate is called the 'floating rate'. So if the interest rates move upwards, the coupon rate on your instrument follows. Simple. This works well for investors who prefer stability in the portfolio value, even if returns are lower. By virtue of their design, these funds are better equipped to respond to market volatility and mitigate the risk arising from interest rate fluctuations.

Debt funds, therefore, are not entirely in trouble. You need not go running for cover in equities. Debt is a wide and varied arena. And there do exist options that adjust your expectations to the prevailing financial market forces. That, in essence, is what all those high-powered people in pinstripes are paid for: to meet your needs, no matter what the circumstances.